China to State-Owned Airlines: Cancel, Delay Aircraft Orders

China, once seen as an expanding market for aircraft, is asking its state-owned airlines to cancel or defer new aircraft purchases due to the current global economic unrest. The Civil Aviation Administration of China posted an announcement on its website Wednesday that all aircraft orders were to be halted. This move could hurt aircraft manufacturers Boeing and Airbus, who had looked to China’s formerly booming aviation industry to support future demand for their products.

As recently as July, Air China Ltd. announced that it was buying 45 Boeing jetliners, and China currently has 430 unfilled aircraft orders with Airbus. Chinese airlines currently operate a fleet of 1,208 planes, with aircraft manufactured by Boeing and Airbus making up the greatest percentage of the fleet, with 57 percent and 33 percent of the fleet, respectively. Prior to China’s airlines’ recent troubles, manufacturers estimated that China’s market would represent nearly 15 percent of worldwide demand for mid-sized commuter and airline jets in the next 20 years, and China’s aviation industry was expected to continue to expand rapidly.

However, China carriers in recent months have been squeezed by high oil prices and reduced passenger demand, and are running a reported $758 million dollar loss. The Civil Aviation Administration of China wants future aircraft orders to remain halted until the overcapacity within the country is resolved. Additionally, China will not approve any new airlines for operation before at least 2010, and carriers are being urged to switch passenger service to freight when applicable.

According to the announcement on the Civil Aviation Administration of China website, Chinese airlines are also being asked to ground or sell some planes and not to renew leases of aircraft rented from foreign firms.

Thought the ultimate decision whether to cancel or defer aircraft orders is each airlines’ own, China’s top three airlines are unlikely to disobey the administration’s recommendations, in part because both China Southern Airlines and China Eastern Airlines have sought financial help from the government this year, and all of China’s struggling airlines may foresee requiring government financial aid in the near future to stay viable. Thus, it would seem to be in the airlines’ best interests to comply with the administration’s request to halt orders.

As of today, Airbus has released a statement indicating that they have not received a request from China to delay delivery of or to cancel any aircraft orders.

If China’s airlines do cancel aircraft orders, they may be subject to the penalty clauses in their contracts, possibly costing them a significant sum of money. As airlines typically are required to pay much of the cost of the plane in advance, China’s airlines stand to lose cash they have invested with order cancellations.

The good news for manufacturers of PMA parts is that if China cancels or delays orders of new aircraft, it will continue to fly older aircraft longer. This will cause China’s older aircraft to require more maintenance, creating a larger MRO market in China and potentially a greater demand for PMA parts in the Chinese marketplace, as the airlines seek to save money without sacrificing quality.

Only time will tell whether China’s airlines will heed the administration’s guidance, or decide to honor their outstanding orders with aircraft manufacturers, and what impact this decision will have on the PMA industry.